Refinancing a home generates most of the same settlement charges you face when you buy real estate with a mortgage. Unfortunately, most real closing costs are not tax-deductible, but some settlement charges, most of which you would pay anyway, are tax-deductible. All settlement charges, whether tax-deductible or not, appear on the HUD-1 settlement statement that will be presented to you at, or three days prior to closing.
For reasons of uniformity, simplicity, secondary market purchases and servicing company consistency, most mortgage notes are written as of the 1st of the month. Since most mortgage payments are due on the first day of the month, closing your refinance on any day but the first day of the month involves paying some prepaid interest. You will not pay extra interest because of this. For example, should you close on the 10th of the month, you'll pay 20 days of prepaid interest for the current month, but your first mortgage payment is not due for a month and two-thirds, since you pay a home loans in arrears.
Real Estate Taxes
Depending on when you refinance and when your city/town/county property taxes are due to be paid, usually quarterly or semi-annually, you may need to bring your taxes up to date at closing. Like prepaid interest, these are not closing costs, but they are part of your settlement charges. These real estate taxes are deductible on your federal income tax in the year they are paid.
Mortgage Insurance Premiums
Mortgage insurance premiums were tax-deductible in full prior to December 31, 2011. However, while still tax-deductible, private, FHA and VA mortgage insurance premiums must be deducted over the shorter of either the term of the mortgage or 84 months, beginning with the first month the insurance went into effect. Mortgage insurance contracts issued prior to January 1, 2007 are not deductible, per the IRS.
Points you pay to get your new mortgage are typically tax-deductible. But there are conditions. If you want to deduct your points from the current year's tax, you must pay points in cash. If you add the points to your new mortgage amount, you can still deduct them, but you must do so over the life of the mortgage, typically 15 or 30 years. The home must be your primary residence, not a second home. You can deduct points paid for a second home only over the life of the mortgage.
Common Non-Deductible Settlement Charges
Except for prepaid interest, taxes and mortgage insurance, most settlement charges, per the IRS, are non-tax deductible. These usually include, but are not limited to, application fees, document preparation expenses, processing and underwriting fees, wire charges, closing or attorney fees, pest or home inspection costs, title searches and insurance, and postage or courier fees. These can vary by state, so check with your local jurisdiction to learn about your common state-specific closing costs.
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